MUMBAI: Domestic pharmaceutical industry, the largest producer of generics drugs in the world, is expected to continue to face the pricing headwinds that they had faced in FY18 mainly in the US, muting its revenue growth, says a report.
"We expect generic drug pricing headwinds, witnessed in FY18 mainly in the US, to continue over FY19 and keep the sectoral revenue flat and operating margins subdued.
"But, the current level of competition in the US generic market is not sustainable as several small players, who lack scale and efficiency will eventually exit, thereby easing competition," India Ratings said in a report today.
The agency, however, maintained the stable outlook for the sector in FY19 on the expectation of stable growth in the domestic market and a likely improvement in volume growth of generic drugs in the key export markets such as the US and Europe.
Low leverage and strong operating cash flow generation capability are likely to enable most of the large pharma issuers to maintain comfortable rating headroom in FY19.
A more robust solution to overcome the competitive pressure in the regulated market will be to move up the value chain into complex difficult-to-manufacture chemical drugs, which command relatively high defensible prices and margins than commoditised solid oral drugs.
Research and development expenditure, which is a lead indicator of shifting product development focus, increased considerably over FY17 particularly for regulated market focused players.
The agency expects R&D spends to increase further owing to shifting product development focus towards complex generics.
While this can shrink profitability in the near- term, it augurs well for medium-term prospects.
Growth through M&As is a constant theme in the sector, and many companies are likely to consider inorganic growth routes to overcome the current headwinds.
Substantially, large inorganic growth initiatives can alter the leverage trajectory as deleveraging can be protracted, given the current weak pricing scenario.
While many large companies have stepped up regulatory compliance, it still continues to be an event risk, the report said.